Taxation of Financial Assets in Developing Countries

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Abstract
In developing countries most of the financial assets are deposits at commercial banks. This article focuses on the implicit taxation of financial assets through seigniorage, reserve requirements, lending targets, and interest ceilings combined with inflation. The impact of taxation on financial deepening increases significantly with the tax rate, as shown by cross-sectional and time series data for selected countries in Sub-Saharan Africa and Southeast Asia. The problem of measuring revenue is examined, and the efficiency cost of taxation is analyzed in a Harberger framework. Although taxes on financial assets have a low administrative cost, the excess burden caused by the misallocation of resources is probably a much higher fraction of revenues than that of other taxes.

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